Purchasing a home can be one of the most important financial goals of any consumer. A consumer's home can be one of their largest investments. The number of consumers utilizing a conventional mortgage loan to purchase a home or property, payoff debt, or make improvements increase annually. The average consumer tries to minimize their payment by amortizing over extended periods. Many lenders offer amortization periods for terms of ten, fifteen, thirty, or even forty years. The shorter the amortization schedule, the larger the payment is required. A conventional loan payment requires both principal and interest amounts to be paid as part of each payment. The amount of the conventional loan payment stays the same over the amortized period. The principal payments reduce the loan value, thus decreasing the amount of loan interest paid in subsequent payments. The reduction in the loan balance only occurs from additional principal payments. The equity value increases as the amount of the loan decreases. The equity does not generate any return. The positive growth in value of a property from market appreciation is calculated on the value of the property not the equity. The total out of pocket costs for a conventional loan with a loan rate greater than zero percent are always greater than the face amount of the loan.
Rising home prices are forcing consumers to allocate larger percentages of earned income towards housing. More and more consumers are required to have two incomes to afford a home. Home buyers are paying premiums for properties in attractive areas as housing markets continue to appreciate. Many consumers make a mortgage payment that represents a large percentage of their net income. This strain on the household budget results in rising bankruptcy rates. Finding suitable amounts of disposable income needed to allocate for long term financial goals challenges consumers. With the rising costs of goods and services many consumers are falling short or not adequately meeting their investment goals. The consumer needs control, choices, and flexibility before the housing market reaches a level that puts the dream of owning a home out of reach for the average consumer.
Lending institutions find themselves in a competitive market place. Consumers routinely make loan decisions based primarily on minimizing the current interest rate on their loan. The level of consumer loyalty continues to diminish. As rates decline the volume of loan refinancing increases, therefore the industry is faced with positioning laws prohibiting abusive refinancing arrangements. Lending institutions are faced with many risks. Institutions deal with risks of default, declining property values, interest rate risks, declining fee income from mortgage interest over time and the risk of pricing loans so they are not competitive.